Going Global Series

Financing Trade Credit

Structured Receivables Financing Alternatives

For Exporters

July 21st, 2016

Webinar Participants & Panelists

Moderator

Edwin Bell, PhD

Sr. Manager - W.W. Grainger, Inc.

Credit Administration

Panelists

Gent K. Culver, ICCE

Credit Manager

International Game Technology

Bruce Miller

Managing Director – Finacity Corporation

Origination / Relationship Management

David Viney

Managing Director – Finacity Corporation

Head of Global Origination

Jim Leonard

Managing Director – Finacity Corporation

Alternative Liquidity Solutions

• Today we will examine and review some of the credit

products that have been developed by the industry to finance international trade. These have been designed to help:

Reduce/transfer the risks inherent in the collection of receivables

Provide cash flow and working capital relief so exporters can be profitable in a global marketplace

• Credit Products Reviewed:

Factoring Forfaiting Securitization Asset Based Lending

Introduction and Objective

Overview of Factoring

• Funding to the borrower/seller is through the legal and outright sale of

receivables to an independent or bank-owned factor (with OR without recourse).

• Depending on the type of factoring, Customer/Obligor may be notified of the

factor’s purchase of the receivable, and may verify the accuracy of the invoice.

• Receivables payments are generally directed to a blocked account or lockbox

controlled by the factor.

• Product available in many countries; multi-country solutions may be available in

some regions.

• “Committed” funding of eligible receivables can often be arranged for a period of

between one and three years

• Retentions are held against dilutions (non-cash reductions in receivables due)

• Factor funding levels, or the Advance Rate, are generally between 70% and 90%

of the eligible assets. The balance is released to the client after payment is

received and after the deduction of the factor’s fees and interest.

• Facilities are typically revolving - new receivables are purchased and funded

periodically (i.e., daily, weekly, etc.).

Factoring

Strengths

Wide range of solutions - with or without recourse

Tailor Made – funding, balance sheet optimization, suppliers support, risk mitigation

Revolving Structures

Low complexity

Scalable solution

Easy to combine large and small facilities

Outsourcing

Revolving cash generation according to Business Plan

Open for syndication

Low Regulatory Capital allocation- (Basle II)

Off-balance sheet treatment may be possible

Weaknesses

Some activities excluded

Restricted to Commercial obligors/B2B

Payment terms usually limited to between 120 and 180 days maximum

Overview of Forfaiting

• Forfaiting involves the non-recourse purchase by a third party of an importer’s

documented future payment obligations related to the prior delivery by an

exporter of a specific good or product.

• Exporter receives discounted cash proceeds with no future receivable reported

on its balance sheet.

• Most commonly used in cross-border trade of relatively large-ticket capital goods

that often require relatively longer, often multi-year, payment terms. Terms of 180

days to 5 years are often possible.

• The importer’s future payment obligations are typically documented under a

promissory note, bill of exchange or other negotiable instrument.

• Bank-avalized paper dominates the market today.

• Payment risk on importers / banks in most countries can be discounted.

• There is a fairly active secondary market for the purchase and sale of many

forfaiting assets.

Forfaiting - Strengths & Weaknesses

Strengths

Flexibility in terms of amount, tenor and risk acceptance

No set up cost for the exporter

Speed of conclusion

Efficient also for one-off transactions

No further reporting requirements and administration

Gives quick access to new markets without payment risk

Growing business without increasing risk position

Expansion of global trade

Weaknesses

Needs a direct acknowledgement from the debtor

Potential for different treatment in different jurisdictions

Overview of Trade Receivables Securitization:

• Funding is accomplished:

Through the true sale of receivables to a bankruptcy remote special purpose

entity (SPE), which isolates the A/R from a legal and credit perspective.

Simultaneously, the A/R collateral in the SPE is used to borrow cash from a

funding source(s).

• Funding sources are primarily Bank Sponsored Commercial Paper Conduits, Bank

Balance Sheets, and/or Private Institutional Investors.

• Funding is typically for between one and five years, on a committed basis.

• To achieve competitive pricing, the receivables pool/SPE is credit enhanced to an

investment grade ( ‘A’, ‘AA’ or ‘AAA’) structure, using credit rating agency criteria.

• Credit enhancement requires setup of reserves. These are held back, effectively

creating an advance rate.

• The two main reserves, loss (delinquency) and dilution, are determined based on the

historic performance of the receivables portfolio.

• Facilities are typically revolving - new receivables are purchased & funded daily.

• Collections are remitted to the seller through an account frequently controlled/owned

by the SPE.

Trade Receivables Securitization

Strengths

Competitive pricing /positive credit arbitrage

High liquidity / Maximize collateral efficiency

Committed funding – one to five years

Little or No financial covenants

No impact on customer relationships

Easy to expand to include additional selling entities / countries

Access to new sources of capital

Off Balance Sheet Treatment (GAAP & IFRS) with appropriate level of risk transfer

Can fund capital expenditure, M&A and growth

Weaknesses

Sometimes higher upfront fees – structuring, legal and rating agency

Time to implement and reach funding stage

May involve more Intensive administration and reporting

Complexity can delay implementation

Requires allocation of internal resources in early stages

Overview of Asset Based Lending / Borrowing Base Facilities:

• Asset Based Lending is a secured lending product typically in the form of a revolving

line of credit. For exporters, it can be used to provide working capital finance.

• Advances are based on a borrowing base formula as a percentage of the value of a

company’s assets. The most prevalent assets financed are trade accounts receivable

and inventory, but plant & equipment, real estate and other assets are sometimes

utilized.

• Invoices or receivables are not sold to the lender. Instead, the lender takes a security

interest in the receivables. The Borrower continues to take the credit risk of collection.

• Advance rates against “eligible” collateral vary - typically 80 - 85% for accounts

receivable, 50 - 65% for inventory, 50 - 75% for plant and machinery and 25 - 65% for

real estate – all established through analysis and appraisals. Borrowing Bases are

updated regularly to reflect the ongoing value of collateral.

• Facilities are committed, on balance sheet financings with typical tenors of 3 to 5

years.

• The Borrowing Base Facility construct was developed, and is still most widely used, in

North America, but is becoming increasing popular in Western Europe and elsewhere.

• Eligibility of Borrowing Base assets varies from country to country, related primarily to

local bankruptcy laws, but lenders are generally comfortable with A/R in most West

European countries.

Asset Based Lending / Borrowing Base Facilities

Strengths

High liquidity / immediate availability

Committed term funding

Funding based on eligible assets, not solely cash flow

No impact on client relationship. No notification of client

Funding limits expand as underlying assets increase – follows business growth

Access to new sources of capital

Can provide incremental funding compared to cash flow lending

Can also fund capital expenditure, M&A and growth – not just working capital

Relatively immature market outside US, but eligible geographies are expanding

Weaknesses

Does not provide risk mitigation for customer/receivable default

ABL is secured debt on balance sheet

greater administration and reporting requirements (“securitization ‘light’.”)

Requires pledge against all eligible assets

Geographic limits based on local jurisdictional differences in asset assignability and bankruptcy laws.

Increases bank debt/leverage for reporting/ covenant purposes

Biographies of

David Viney

Managing Director – Global Head of Origination

David has over 20 years of experience in the structured finance business, having advised clients at C-level in the United States, Europe, Asia

and the Middle East.

David started his investment banking career at Barclays de Zoete Wedd and has worked in the securitization teams at Bank of America,

Mizuho and RBS. David headed the RBS conduit securitization business in Europe before moving to the United States to establish the RBS

conduit securitization business in North America. He was subsequently appointed RBS Country Head for Qatar, with responsibility for the

RBS Qatar branch and its relationships with Qatari GREs.

David holds a M.B.A. (Distinction) in Finance from Alliance Manchester Business School, the Financial Studies Diploma (“DipFS”) and is an

Associate of the Chartered Institute of Bankers (“ACIB”).

Bruce Miller

Managing Director – Origination / Client Relationship Management

Bruce has over 25 years experience in Securitization, Capital Markets, Commercial Banking, and Trade Finance.

His primary responsibility at Finacityis the origination and structuring of Trade Receivables Financings. Mr. Miller was Head of the Americas

Securitization Group at ING Capital, Director at Credit Suisse First Boston, where he founded the firm’s original ABCP Conduit & Credit

Products Group. He headed Daiwa Bank’s securitization business in the Americas He has advised clients and executed securitizations in

most asset classes, with particular emphasis on Trade Receivables

Mr. Miller holds a Bachelor’s degree in Economics from St. John’s University and a M.B.A. from the New York University Stern School. He has

taught corporate finance at the undergraduate level, and has been a guest speaker at industry conferences.

Jim Leonard

Managing Director – Alternative Liquidity Solutions Jim spearheads Finacity’s alternative asset origination and distribution activities. His offers clients working capital solutions such as

factoring/invoice finance, asset-based lending, supply chain finance and structured trade finance, in addition to Finacity’s core trade

receivable securitization business.

Prior to Finacity, Jim was a director at Rosemount Capital Management, where he managed the origination, trading and syndication of trade

and commodity finance assets in Latin America and Eastern Europe. Before that, he was head of international marketing for the Financial

Institutions Group at Bank of Tokyo-Mitsubishi New York. Jim also had stints at Citicorp Investment Bank, Global Structured Trade Solutions,

and Goldman Sachs. He has a BS in Economics from the College of William and Mary, and an MBA in International Finance from NYU. He

holds both US and EU citizenship.

Panelists